Aoyuan Healthy (3662 HK)

Multiple engines driven simultaneously

Hong Kong |Property Management | Update Report

BUY (Maintain)

CMP HKD 6.21 (Closing price as at 7 October)

TARGET HKD 10.72 (+72.9%)

Investment Summary

On September 18, 2020, Aoyuan Healthy announced the acquisition of Zhejiang Liantianmei Corporate Management Company Limited (浙江連天美企業管理有限公司) 55% equity, together with the company`s 5% equity acquired in March this year, the company holds a total of 60% equity in the target company. The cash consideration is capped at RMB 691 million. The consideration will be divided into three phases. The company has paid a total of RMB 374 million for the first two phases, and the balance of the remaining consideration in the third phase will be paid on or before March 31, 2021. The total consideration will be based on Liantianmei`s 2020 net profit calculated at 16.66x P/E, the valuation is reasonable.

Changes in the company`s revenue structure and increased business GPM

The company completed the strategic deployment of its medical beauty sector through acquisitions and formed synergy with other businesses. The acquired company has two private medical beauty hospitals in Hangzhou, with a total operating area of approximately 30,000 sqm, both of which have been awarded 5A Rating Management Standard and possess the operational qualifications for standardized medical institutions. The number of employees is 626, including 73 doctors, 94 nurses and 7 pharmacists. The business includes plastic surgery, micro plastic surgery, dermatology, dentistry, hair transplantation, Chinese medicine and life beauty, etc., mainly services with higher technical barriers.

The average turnover of Liantianmei in the past two fiscal years was approximately RMB 470 million. However, the company has made compliance adjustments and expanded new hospitals in the past two years, resulting in a decline in annual profits. It is expected that as the target company`s integration work is completed, profitability will increase. In the first half of 2020, it will record a turnover of RMB 210 million and a net profit of RMB 46.16 million, reflecting the target company`s ability to control costs and demand for medical beauty services toughness. The company has more than 300,000 customers, of which long-term customers account for a relatively large proportion, indicating that the business is sticky. The acquisition target is expected to contribute more than 5,000 equity net profits next year.

The consideration for the acquisition is capped at 691 million, that is, if the net profit of the acquisition target in 2020 exceeds 75 million, the upper limit consideration will be required. We expect the net profit target to be achieved. In terms of acquisition funds, the company reallocates the net proceeds from the global offering for the intended use, and reallocates the remained funds originally intended for other purposes to acquisition or investment in service providers providing services complementary to the Group`s commercial operational services and property management services, the remained net balance used to acquire health medical beauty service providers after reallocation is RMB 215 million. The company also considers financing through annexation loan, but will take into account the company`s overall leverage.

Three business sectors archive synergy

Aoyuan Healthy has further acquired Liantianmei and completed its deployment in the medical beauty sector. In the future, through Aoyuan Healthy`s community as an entrance, on the one hand, it has a large group of owners as potential customers, on the other hand, it has a wealth of offline advertising resources and commercial areas, which help Liantianmei reduce sales costs and introduce passenger flow. At the same time, Aoyuan Healthy`s property and commercial services cover major areas such as the Greater Bay Area, Beijing Rim, Central China and East China, which will help Liantianmei further expand its scope of influence. We believe that the acquisition enables the company to open up a new blue ocean in addition to traditional property management services, and to further provide the company with sustained revenue growth through community traffic through community VAS.

Investment Thesis

As the acquisition of Liantianmei provides the company with further growth momentum, we have revised our previous forecasts and raised the company`s 2020E 2021E EPS to RMB 35.60 cent and RMB 52.43 cent, considering that the company`s contribution to revenue after the acquisition will begin to be significant next year, and maintain FY21E target P/E ratio, raise the target price of HK$10.72 to correspond to the 26.50/19.7x P/E for 2020E and 2021E, and maintain the BUY rating

COMPANY DATA

O/S SHARES (MN) :	726.25
MARKET CAP (HKD MN) :	4531.8
52 – WK HI/LO (HKD):	9.65/3.91

SHARE HOLDING PATTERN, %

China Aoyuan	54.58
Chiu Man Wai	6.35

KEY FINANCIALS

CNY mn	FY18	FY19	FY20E	FY21E
Net Sales	619	901	1,545	2,900
Net Profit	78	162	259	381
EPS, CNY cent	11.44	23.78	35.60	52.43
P/E, x	N/A	23.62	15.77	10.71
BVPS, CNY	N/A	1.17	1.49	2.04
P/BV, x	N/A	4.82	3.78	2.75
DPS (CNY cent)	5.5	9.0	10.4	11.9
Div. Yield (%)	N/A	1.57	1.81	2.08

PHILLIP RESEARCH STOCK SELECTION SYSTEMS

Total Return	Recommendation	Rating	Remarks
>+20%	Buy	1	>20% upside from the current price
+5% to +20%	Accumulate	2	+5% to +20%upside from the current price
-5% to +5%	Neutral	3	Trade within  ± 5% from the current price
-5% to -20%	Reduce	4	-5% to -20% downside from the current price
<-20%	Sell	5	>20%downside from the current price

Disclaimer

We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock`s risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation
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